• The stars are aligning. Baseline equity investor sentiment is picking up, despite some recent profit-taking. Key fundamental factors are aligning positively, with the US economy remaining resilient as inflation data crests to set the stage for the Federal Reserve (US Fed) to begin the rate cutting cycle. The worst is over for the MYR, which will be supported by the commencement of the fiscal reform process, improving business sentiment and more domestic-centric asset allocation priorities by government-linked asset managers. Geopolitics and the US presidential election are key sources of volatility. Accumulating positions on weakness is a key investment theme.

• Still rosy. Our global macroeconomic outlook remains constructive. We still expect both the US and China to achieve above-consensus YoY GDP growth rates of 2.5% and 5.0% this year, which should boost the climate for global trade, tourism and investment. However, inflation remains sticky and risks are rising that the US Fed may maintain the Federal Funds Rate (FFR) in 2024 (RHB’S base case: One cut in December), given the tight US labour market and resilient consumer. While the macroeconomic picture offers the market broad positive support, the risk of the US Fed not cutting rates this year is for the USD to remain robust in the near term, although the house view is for the MYR to strengthen further out (RHB’s end-2024F USD/MYR rate: 4.65, end- 2025F: 4.40). A second coming for Donald Trump in the US election will mean significant policy risks, and could further raise geopolitical tensions.

• Progress on domestic reform. Markets were positively surprised by the recent progress on diesel subsidy rationalisation, given the scepticism on the amount of political will available to make unpopular decisions. The focus is now on how the Malaysian Government manages the fallout from the recent diesel price hike, and the implications of RON95 subsidy adjustments that may now be pushed back until end-2024. Careful execution of economic initiatives including the recently announced National Semiconductor Strategy, economic cooperation with China and Johor-Singapore Special Economic Zone (JSSEZ) are key priorities to position the unity coalition strongly as it prepares to enter the latter half of its 5-year mandate.

• Strategy. Corporate earnings have turned the corner. The macroeconomic big picture is positive, coupled with progress on domestic reform initiatives. These are catalysts to attract and develop new sources of FDIs, and news flow will retain a positive bias as business and investor sentiment improves. Even as markets seek clarity on US monetary policy, short-term catalysts could be in short supply. Still, we expect the market to be well-supported by the pooling of domestic liquidity as the MYR bottoms out to set the stage for the return of foreign portfolio funds. We are OVERWEIGHT on the property, construction, technology, healthcare, transport, oil & gas (O&G), utilities and rubber products sectors. Our end-2024 FBM KLCI target is 1,720pts after ascribing a 16x target P/E (premium to 15.3x mean) on forward FY25F EPS.

Source: RHB Securities Research - 5 Jul 2024